The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies OrthoPediatrics Corp. (NASDAQ:KIDS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is OrthoPediatrics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 OrthoPediatrics had US$10.3m of debt, an increase on US$871.0k, over one year. However, its balance sheet shows it holds US$47.7m in cash, so it actually has US$37.4m net cash.

A Look At OrthoPediatrics' Liabilities

Zooming in on the latest balance sheet data, we can see that OrthoPediatrics had liabilities of US$45.8m due within 12 months and liabilities of US$20.8m due beyond that. On the other hand, it had cash of US$47.7m and US$36.3m worth of receivables due within a year. So it can boast US$17.4m more liquid assets than total liabilities.

This short term liquidity is a sign that OrthoPediatrics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that OrthoPediatrics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OrthoPediatrics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year OrthoPediatrics wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$162m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is OrthoPediatrics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that OrthoPediatrics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$48m of cash and made a loss of US$22m. With only US$37.4m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, OrthoPediatrics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with OrthoPediatrics (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com